The 1% Move Report

Wealth Management — April 6, 2020

• US stocks rallied sharply on Monday, as the S&P 500 gained 7.0% to close at 2,664. With the rally, the index is now down 17.6% year to date and has corrected 21.4% from the February 19 all-time high.
• A weekend without any major negative market-moving headlines appeared to be enough for markets to rally on Monday. Further, there were glimmers of hope in recent virus data, as new case growth in Italy appears to be stabilizing, while hospitalizations in New York have declined in recent days. While too early to draw conclusions from this data, signs of stabilization after weeks of bad news as it relates to COVID-19 appeared to be enough to boost sentiment on Monday.   
• All 11 S&P 500 sectors were higher Monday, with Information Technology (+8.8%) and Utilities (+7.9%) outperforming the broader market, while Energy (+5.2%) and Consumer Staples (+3.9%) lagged.
• Rates were higher across the curve, with the yield on the 10-year rising to 0.67% as of the 4 p.m. equity close. The yield curve steepened, as 10-year rates rose more than 2-year rates. WTI oil declined 7% on the session, while gold increased 2.8%; the US dollar was modestly higher, as measured by the US Dollar Index. 

US stocks rallied sharply on Monday, with the S&P 500 rallying 7.0% to close at 2,664. A weekend without any major incrementally negative headlines appeared to be enough for markets to rally on Monday, with stocks posting sharp gains while Treasuries sold off as rates moved higher. Perhaps some green shoots in the COVID-19 data in several global hot spots helped boost sentiment Monday: In Italy, the number of new cases appears to be stabilizing, while in New York, the number of hospitalizations has fallen in recent days. While too early to draw any conclusions from the data, after several weeks of seemingly endless bad news as it relates to COVID-19, any good news is welcome, and it would appear the social distancing measures that have been enacted may be helping to limit the spread of the virus. Still, uncertainty remains extraordinarily elevated, and volatility is likely to remain high across financial markets, particularly as the global economy slides into recession as a result of the “sudden stop” in economic activity across much of the world. The negative economic effects have become more tangible in recent weeks, as unemployment has spiked and consumer and corporate activity has fallen dramatically. Importantly, however, policy makers have acted, and record levels of stimulus should help ease the burden the current crisis is putting on households, businesses and the economy at large.    

Last month a one-two punch of monetary and fiscal policy was delivered in the US, as policy makers look to confront these current economic challenges. On the monetary front, the Federal Reserve has announced a slew of initiatives aimed at stabilizing fixed income markets in an effort to ensure liquidity flows through the financial system, and they have continued to tweak their programs as they look to address ongoing issues in funding markets. On the fiscal front, the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law late last month; the CARES Act calls for $2 trillion+ in federal assistance and loans for those individuals, businesses and organizations most affected by the “sudden stop” in economic activity caused by the spread of the coronavirus. As it has become clearer in recent weeks that the economy will take a near-term hit as a result of disruption associated with the spread of the coronavirus, markets have seemingly been calling on policy makers to act, as both fiscal and monetary policy will likely be needed to address the economic risks at hand; with the enactment of the CARES Act alongside unprecedented levels of monetary support offered by the Federal Reserve, it would appear policy makers are answering that call.  

While markets have struggled for much of the past seven weeks as the virus and its economic-related impacts have spread across the globe, decisive action from US policy makers may have changed the tide; the S&P 500 has now rallied ~22% from the March 23 intra-day low. This comes after a period in which the S&P 500 failed to rally in consecutive sessions in more than a month of trading. That said, investors should be prepared for the market to remain volatile in the coming weeks, particularly given the nature of the current market sell-off, which has been driven, in part, by anxiety over the unknown as it relates to the spread of the coronavirus. To that end, the market is pricing in volatility to remain extraordinarily high, as measured by the CBOE Volatility Index, or the VIX. The VIX tested its 2008 Financial Crisis highs in mid-March spiking above 80, but has fallen steadily since, and is currently trading below 50. While the VIX coming down from recent highs is an encouraging sign for markets, current levels still imply a ~3% daily average move for the S&P 500 over the next 30 days. From a relative valuation standpoint, equity earnings and dividend yields also look attractive when compared to long-term Treasury rates, suggesting the market has priced in substantial risk, and opportunities may be presenting themselves for long-term oriented investors.  

The dual shocks of coronavirus and the collapse of OPEC-plus, causing oil prices to fall dramatically, are likely to push the global economy into recession over the next 1-2 quarters, ending the 11-year business cycle. However, the swift and furious bear market sell-off since the S&P 500 all-time high on February 19 leaves most asset classes already fully discounting that outcome. Furthermore, we are anticipating an increasingly coordinated “do whatever it takes” stance from global policymakers who are likely to deliver both monetary and fiscal stimulus that should stabilize things as we navigate the human disruption and health-related parts of the crisis. On the other side of the recession, we see potential for a global recovery. Green shoots were already visible outside the US, and inside the US, the foundational health of the consumer has never been stronger to weather a recession, i.e., low unemployment, strong balance sheets and housing market with momentum. Consequently, in recent weeks the GIC has reduced exposures to long-duration Treasuries and began rebuilding exposure to US large-cap growth, US small/mid-cap stocks, US credit and commodities. While we believe the current equity market correction constitutes a cyclical bear market within a longer-term equity bull market, the GIC believes a new multi-year bear market in fixed income has begun. The next leg of the secular bull market in equities is unlikely to see the same leaders as the past decade—namely Technology and Consumer Discretionary stocks. Instead, the GIC sees Financials, Industrials and Health Care stocks likely to outperform. Volatility over the next few quarters should be exploited frequently to rebalance portfolios to strategic asset allocations.

Market data provided by Bloomberg.

Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

NASDAQ Composite Index: A broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.

S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

US Trade-Weighted Dollar Index: A weighted average of the foreign exchange value of the US dollar against a subset of the broad index currencies that circulate widely outside the US.